Are These 2 Oversold Stocks Worth Another Look?

MTY Food Group (TSX:MTY) and Uni Select Inc (TSX:UNS) crashed after fourth quarter results. Is it time to considering adding their stocks to your portfolio?

| More on:

There are a few key metrics that investors can use to determine a good entry point for a particular stock. One such indicator is the 14-day relative strength index (RSI). The 14-day RSI is one of the most commonly used momentum indicators.

An RSI over 70 signifies that the stock is overbought and may be due for a correction. Conversely, an RSI below 30 is a sign that the stock is oversold and may be due for a short-term bounce. Two stocks that have touched an RSI below 30 recently are MTY Food Group (TSX:MTY) and Uni Select (TSX:UNS). Does recent weakness mean a good entry point? Let’s take a look.

MTY’s fourth-quarter results

MTY Food Group was cruising along until it released fourth-quarter and year-end results. Before results, the company was up approximately 15% in 2019. After it missed on earnings, the company’s stock price crashed and it is now down about 2% year to date.

The fourth quarter wasn’t all bad, however. Although earnings of $0.54 missed by 26%, revenue of $108.52 million beat by 25%. Of concern, same store sales dropped by 1.3% year-over-year. The company pointed to unusual weather patterns south of the border as having the most significant impact on this metric.

Given the pace of acquisitions, the company has many non-recurring expenses, which leads to significant earnings volatility. However, the company is growing sales at a 20%+ clip and cash flows are experiencing equally strong growth. Last month, the company raised its dividend by 10%, as it expects cash flows to remain strong through 2019.

The headlines have led to overreaction and MTY’s stock is oversold. It is now trading at a cheap price-to-earnings (P/E) of 14.89 and a P/E to growth (PEG) of 0.86. Given its impressive track record, expected growth profile and cheap valuations, MTY is due for a bounce.

Uni Select fourth-quarter results

Much like MTY, fourth-quarter and year-end results was the catalyst for Uni Select’s recent price correction. Since reporting earnings last Wednesday, the company’s stock price has lost almost 35% of its value. It’s therefore no wonder that the company has quickly entered oversold territory.

Uni Select earnings of $0.13 missed by 28% and revenue of $419.45 million missed by approximately $2 million. In 2018, revenue grew by 21% on the back of recent acquisitions while organic sales eked out a 1.5% gain. Particularly concerning are margin pressures, which are expected to continue along with an expected drop in profitability. The company also remains without a permanent president and CEO. Certainly, the lack of leadership at the top is certainly a headwind.

As of writing, Uni Select has jumped from an RSI of 19 to 28 and as such, still has room for an upwards move. However, the company lacks a clear path to growth, is without a CEO and is trading at valuations (P/E, PB, PEG), in line with industry averages. I expect continued volatility in the stock.

Foolish takeway

Although both MTY Group and Uni Select are currently oversold, MTY is the more reliable long-term play. Both may experience a short-term bounce, but MTY’s looks more sustainable over the long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor mlitalien has no position in any of the stocks mentioned. The Motley Fool owns shares of MTY Food Group. MTI is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »